Invoicing and documents
Quotation
A quotation is a formal document given to a potential buyer that offers specific goods or services at a fixed price under defined conditions for a limited time.
What is Quotation?
A quotation, often called a quote, is a formal offer you send to a prospective client detailing the exact price for specific goods or services. Unlike an estimate, which provides a rough guess of costs, a quotation represents a fixed price commitment. When you issue a quotation, you are promising to deliver the items at the stated price, provided the customer accepts the offer within a specified validity period. Once the buyer officially accepts your quotation, it typically becomes a legally binding contract between both parties. This protects the buyer from unexpected price increases and gives you a clear scope of work. You must clearly outline the item descriptions, quantities, unit prices, and any applicable taxes. Including clear payment terms and an expiration date is essential to prevent disputes and encourage a timely decision.
How Quotation works
The process begins when a customer requests pricing for a specific set of products or a well-defined service. You evaluate the request, calculate your material costs, labour, and desired profit margin, and then prepare the document. You send this formal quotation to the client, ensuring you state how long the offer remains valid. The client reviews your proposal against their budget and requirements. If they agree to your terms, they formally accept the quotation, often by signing it or issuing a purchase order. At this point, the agreement is binding. You then deliver the goods or perform the services as specified. Finally, you generate a sales invoice based exactly on the agreed quotation to request payment.
- The customer requests a fixed price for specific goods or a defined project scope.
- You calculate costs and issue a formal document detailing exact prices and terms.
- You include a clear validity period to limit how long the price remains available.
- The customer reviews the offer and formally accepts it before the expiration date.
- The accepted quotation becomes a binding agreement to deliver at the stated price.
- You fulfill the order and issue a final invoice matching the quoted amounts.
Worked example
Gulf Coast Trading receives a request for custom office furniture. They prepare a quotation for 10 executive desks at $400 each and 10 ergonomic chairs at $150 each. The subtotal is $5,500. They add a delivery fee of $200, bringing the total before tax to $5,700. If the local tax authority requires a 5 percent value-added tax, the tax amount is $285 ($5,700 multiplied by 0.05). The final quotation total is $5,985. Gulf Coast Trading states the quotation is valid for 14 days. If the client accepts on day 10, Gulf Coast Trading must honour the $5,985 price.
Why it matters for your business
Issuing accurate quotations is vital for protecting your profit margins and managing client expectations. If you underestimate costs on a fixed quotation, you must absorb the loss once the client accepts the binding offer. Conversely, a clear and professional quotation builds trust, showing clients exactly what they will pay with no hidden surprises. Including a strict validity period protects your business from future material price increases or inflation. Paper & Pen creates invoices, quotations and receipts, helping you convert accepted offers directly into billing documents without retyping data. This ensures your final invoice matches your initial commitment perfectly.
Questions
Common questions
What is the difference between an estimate and a quotation?
Can I change the price after sending a quotation?
What happens if a quotation expires?
Related terms
- Estimate An estimate is an approximate calculation of the expected cost for a specific job or project, provided by a business to a potential client before work begins.
- Proforma invoice A proforma invoice is a preliminary bill sent to buyers in advance of a shipment or service, detailing the estimated costs without creating a legal demand for payment or an accounting receivable.
- Sales order A sales order is an internal document generated by a seller upon receiving a purchase order, confirming the details of the goods or services to be provided to the buyer.
- Invoice An invoice is a commercial document issued by a seller to a buyer, detailing the products or services provided and specifying the amount owed for that transaction.
- Credit note A credit note is a commercial document issued by a seller to a buyer, reducing or cancelling the amount owed on a previously issued invoice due to errors, returns, or damages.
- Debit note A debit note is a commercial document issued by a buyer to request a credit, or by a seller to increase the amount owed on an existing invoice.